Problem

Case Study: Titan Insurance Company

The Titan Insurance Company has just installed a new incentive payment scheme for its lift policy sales
force. It wants to have an early view of the success or failure of the new scheme. Indications are that the
sales force is selling more policies but sales always vary in an unpredictable pattern from month to month
and it is not clear that the scheme has made a significant difference.
Life Insurance companies typically measure the monthly output of a salesperson as the total sum assured
for the policies sold by that person during the month. For example, suppose salesperson X has, in the
month, sold seven policies for which the sums assured are £1000, £2500, £3000, £5000, £10000, £35000.
X's output for the month is the total of these sums assured, £61,500. Titan's new scheme is that the sales
force receive low regular salaries but are paid large bonuses related to their output (i.e. to the total sum
assured of policies sold by them). The scheme is expensive for the company but they are looking for sales
increases which more than compensate. The agreement with the sales force is that if the scheme does
not at least break even for the company, it will be abandoned after six months.
The scheme has now been in operation for four months. It has settled down after fluctuations in the first
two months due to the changeover. To test the effectiveness of the scheme, Titan have taken a random
sample of 30 salespeople measured their output in the penultimate month prior to changeover and then
measured it in the fourth month after the changeover (they have deliberately chosen months not too
close to the changeover). The outputs of the salespeople are shown in Table 1
Questions:
a. Describe the five per cent significance test you would apply to these data to determine whether new
scheme has significantly raised outputs? b. What conclusion does the test lead to? c. What reservations
have you about this result?( d. Suppose it has been calculated that in order for Titan to break even, the
average output must increase by £5000. If this figure is alternative hypothesis, what is: (i) The probability
of a type 1 error?
(ii) The probability of a type 2 error?
(iii)The power of the test?

Solution steps

Acquire data, clean data, understand data,

Coin Hypothesis Statement
Test the Hypothesis
Summarise the result of the testing
Give recommendation
Find the probability of type 1 error
Find the probability of type 2 error
Find the power of test

Grading:

Q1…10 Marks
Q2…5 Marks
Q3…10 Marks
Q4a…5 Marks
Q4b…5 Marks
Q4c…5 Marks
What have students missed?
1. EDA steps
2. Explanation of the reservations in business context.

What students have assumed wrongly:

1. Power of test

How this helps student:

Correct application and interpretation can be used as an expertise for data analysis and
hypothesis testing.